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AIG Changes Direction on Payback Plan as Outlook Improves

Source: Dow Jones

Posted on 26 Feb 2010

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American International Group Inc. (AIG) and its federal overseers have decided to scrap a plan to use cash flows from life-insurance policies to repay $8.5 billion in debt to the Federal Reserve Bank of New York, according to people familiar with the matter.

The decision, which comes as AIG prepares to report fourth-quarter results Friday, follows a market recovery over the past year that could improve the government-controlled insurer's chances of repaying its debts to U.S. taxpayers.

AIG now believes it can repay the $8.5 billion through other means, such as with cash generated by its insurance businesses and asset sales, according to people familiar with the matter.

The move reflects expectations that AIG's asset sales will be at prices above what the company and government officials anticipated in March 2009, when tumultuous financial markets led the Treasury Department and New York Fed to take additional steps to stabilize the giant insurer following its initial bailout in September 2008.

Creating $8.5 billion in securities backed by cash flows from policies underwritten by some of AIG's U.S. life-insurance units was one of the mapped-out steps.

The giant insurer, 80% owned by taxpayers, is under pressure to start repaying chunks of government money, as many other recipients of U.S. aid have already done. Despite the recent optimism, it still has an uphill task. As of Feb. 24, AIG owed the New York Fed $25.3 billion under its revolving credit facility. In total, it is trying to repay over $90 billion to U.S. taxpayers.

While the company is likely to report a fourth-quarter loss on Friday, many of its core insurance businesses have stabilized over the past year.

AIG is now close to selling one of its large foreign life-insurance businesses to MetLife Inc. for $15 billion, and is preparing to launch an initial public offering for another foreign unit that could fetch $10 to $20 billion in the coming months, analysts have estimated.

So far, AIG's planned deal with MetLife has been delayed by a tax issue, and volatile stock markets could affect the coming IPO.

The bulk of proceeds from the foreign life unit sales will go towards repaying the New York Fed, which earlier exchanged $25 billion of its AIG debt for equity in the two companies, American Life Insurance Co. and American International Assurance Ltd. (That amount is separate from the $25.3 billion AIG owes the New York Fed under its revolving credit facility.)

The sales of the units and the securitization were among the steps mapped out in March 2009, when AIG reported a record $99.2 billion loss for the year 2008 and the U.S. government restructured its aid package to the company.

Under the part of the plan now scrapped, the life-insurance securities were to be transferred to the New York Fed, which would reduce its AIG debt by that amount. The regional Fed bank would then recoup the money when the "securitization notes" paid off over time.